Unnerved by a market crash and years of extraordinary volatility, many clients are hiding from risk. To Tim Noonan, managing director of Capital Market Insights for Russell Investments, these clients' best hope of averting financial calamity is for advisors to help them overcome their fears and get fully behind a good plan.
Noonan (left), whose presentation on designing successful retirement plans was a popular feature of last year's Retirement Income Symposium in Boston, delivered the closing keynote address on Thursday at the fifth annual RIS. In his talk, "Disengagement: Creating the Future You Fear," he observed that lack of engagement in retirement planning is leading people toward the very financial insecurity they dread. What they need to know, and are not finding out, is simply whether they'll have enough money for their needs.
This troubled group includes many planners' clients. For example, Noonan said, 55% of clients polled in one survey insisted that they didn't have a financial plan. The implication is that they hadn't bought into whatever plan their advisor did prepare. If an advisor manages to get clients like these fully engaged, they will change their behavior to help their plan succeed. Noonan suggested that advisors will also be able to develop asset allocation alternatives that provide more "lift" than traditional AA strategies.
Taking the Easiest Route
Noonan reminded the audience that during the financial crisis, most clients "called you and said, 'Get me out of stocks!'" Some beefed up their savings, while a few decided to work longer before retiring. Typically, he pointed out, "people [tend to] take the easiest route."
Another factor in clients' reluctance to commit to a financial plan is cultural. "Investing is deferred consumption, and to be American is to be a consumer," Noonan said. People hate to give up spending on immediate gratification. As a result, they'll actually take the path toward what they most fear—destitution—unless their advisor steps in.
What will it take to get them to modify their behavior? According to Noonan, researcher Matt Greenwald has determined that a new behavior must promise consistency, sustainability and flexibility in order to be adopted. Unfortunately, no retirement income vehicle provides all three.
- Bond ladders, even when structured to be flexible and sustainable, provide inconsistent income because of variations in yield.
- Systematic withdrawals can be both consistent and flexible, but may be unsustainable in the long term.
- Annuities offer consistent, sustainable income but tie up the client's money. People dislike being kept from access to their assets, since they distrust their own ability to predict the future. (Separately, Noonan reprised his 2011 take on annuities' value later in life as an inexpensive way to generate a stream of income replacing portfolio assets depleted earlier.)
Among the lessons for advisors, Noonan said, is that successful plans should include a spending policy and a personal asset liability model, and should take into consideration alternative asset allocation objectives, the option value of deferring annuitization, and the "hyperbolic discount" (the tendency to discount the value of jam tomorrow compared with jam today).
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